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When I am trying to think of a "sexy" idea for a stock, several categories come to mind:


Biotech, particularly cancer cures.

Homeland security -- not weapons manufacturers but the makers of nonlethal weapons or chemical-detection companies.

Some tech -- such as voice-over-Internet protocol (VOIP) or niche chipmakers.

Online advertising -- because of the sheer growth of the industry.

But two events over the past five years have underlined the need for what has probably been the best performing, and the least sexy, sector over the past five years. And it's a sector that will continue to grow for the next five, 10, 20 year, ad infinitum: water.

Water is perhaps the most important global commodity, the one we all need to live, and yet getting clean water has proved to be an increasingly challenging problem in today's world.

The events of 9/11 and the recent tsunami in Southeast Asia underline this further. In the weeks after 9/11, for instance, I remember one weekend when Boston was on "red alert," at least according to the headlines. The rumors were that the Charles River was going to get polluted by terrorists. This, of course, never happened, but it underlined the need for an awareness of how important our water supplies are and the need to keep them purified. The tsunami underscored this even further, as the salt water from the ocean flooded all of the clean water sources of water, spreading disease and putrid water everywhere. The need for purification and desalination of the water became apparent.

In the past I've often recommended stocks that are 20% to 40% down from recent highs and (hopefully) about to stage a comeback. However, these "clean water" stocks have had an unbelievable run over the past several years. That said, I think the run will continue as the businesses continue to grow at double-digit rates for years to come.

Watts Water Technologies

(WTS) - Get Report

. From its business description: "The Company's principal product lines include backflow preventers for preventing contamination of potable water caused by reverse flow within water supply lines and fire protection systems; a range of water pressure regulators for both commercial and residential applications; water supply and drainage products for commercial and residential applications; temperature and pressure relief valves for water heaters, boilers and associated systems; point-of-use water filtration and reverse osmosis systems for both commercial and residential applications; thermostatic mixing valves for tempering water in commercial and residential applications, and pumping systems for under-floor radiant applications."

For the year ending Dec. 31, sales increased 17% year over year to $824 million. Income was up 40% year over year to $46 million. With a $1 billion market cap, the company is trading at only 16 times next year's estimated earnings.



. CUNO makes depth filters and semipermeable membrane filters, used in the potable water, fluid-processing and health care markets.

General Electric

(GE) - Get Report

swallowed up CUNO's main competitor, Ionics, putting the spotlight on CUNO as possibly the next acquisition candidate. For the fiscal year ended Oct. 31, revenue rose 22% to $351.6 million. Net income rose 23% to $33.1 million. The company is trading at 22 times estimated 2005 earnings.

Consolidated Water

(CWCO) - Get Report

is the small-cap play in the sector, providing clean water and infiltration systems to much of Latin America and the Caribbean. From its business description: "Consolidated Water processes and supplies water to customers in the Cayman Islands, Belize, Barbados, the British Virgin Islands and the Commonwealth of the Bahamas. The company sells water to a variety of customers including public utilities, commercial and tourist properties, residential properties and government facilities. In February 2003, the company acquired interests in five companies that operate a total of seven desalination plant facilities. In July 2003, it acquired 13.5% of Waterfields, and in August 2003, acquired an additional 64.7% interest of Waterfields. The company obtained the right, through October 2009, to distribute the DWEER (dual work exchange energy recovery) system, for use in reverse osmosis seawater desalination plants in the Caribbean basin."

For the nine months ended Sept. 30, revenue increased 31% to $18 million. Net income applicable to common increased 31% to $4.1 million.


(PNR) - Get Report

, with a $4 billion market cap, is the largest company in this article. From their business description: "The company's water segment manufactures and markets essential products and systems used in the movement, treatment, storage and enjoyment of water."

For the fiscal year ended Dec. 31, revenue increased 39% to $2.28 billion. Net income from continuing operations increased 40% to $137 million. The company trades at 17 times 2005 estimated net income. Pentair is also a recent

Jim Cramer pick.

I like these stocks for several reasons:

The need for potable water is a trend that is going to continue forever as we deal with increasing populations, the risk of terrorism and weather catastrophes in developing nations.

The sector is not as dependent on the global economy as other sectors, for instance satellite radio or VOIP.

These particular companies are all experiencing income growth greater than the market is giving them credit for, so I think there is potential for upside even without a heavy increase in their growth rates from where they are now.



contributors have recently covered the "clean water" group, including

Jon Markman and

Jonathan Moreland, as has



Chris Atayan.

Markman's article, in particular, provides an excellent overview of the entire sector, including the water utilities. I have left that group out of this piece, preferring to focus on the companies that provide the tools for these utilities. In a forthcoming column, over the next few weeks, I plan to pick one of these companies and provide more in-depth coverage.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of

Trade Like a Hedge Fund


Trade Like Warren Bufffett . At the time of publication, neither Altucher nor his fund had a position in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback and invites you to send it to


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